The easiest way to make donations in retirement

October 28, 2018

Every week, Simply Money’s Nathan Bachrach, Ed Finke and Amy Wagner are answering your financial questions in The Cincinnati Enquirer. If you, a friend, or someone in your family has a money issue or problem, please feel free to send those questions to yourmoney@enquirer.com

Tammy from Florence: I’m 68. What’s the best way for me to continue donating to charity in retirement? Can I still get tax breaks?

Answer: If you have a traditional IRA (Individual Retirement Account), it’s actually quite simple. Once you reach age 70 ½, you’ll need to start taking your Required Minimum Distribution (RMD) from that account. If you make a direct transfer of this money (either all of it or a portion) to an eligible public charity, this is called a ‘qualified charitable distribution’ (QCD). This distribution is tax-free, and it won’t be counted in your taxable income which will save you money on your taxes. You can currently donate up to $100,000 a year from your IRA to charity.

You can make a QCD even if you don’t itemize deductions on your tax return. However, if you do itemize, you cannot make a tax-free transfer to charity and deduct that money as a charitable contribution. This is because making a QCD via a direct transfer technically means the money was never yours (hence why it’s not counted in your taxable income), so you can’t claim a deduction on money you never had. If you decide to skip the direct transfer and withdrawal the money yourself to get the charitable deduction, understand the amount you withdraw will be counted towards your adjusted gross income.

It’s important to note that even though you also have to take RMDs from your traditional 401(k) once you reach age 70 ½, you cannot make a QCD from a 401(k). Instead, you would need to roll money from your 401(k) into an IRA, then make the direct transfer.

The Simply Money Point is that you should review your tax situation before making any charitable giving decisions, especially since the Tax Cuts and Jobs Act passed earlier this year may have changed your situation. We suggest working with a trusted fiduciary advisor (such as a CERTIFIED FINANCIAL PLANNER™ or a Chartered Financial Consultant®) and/or a trusted tax professional.

Doug and Beverly in Cleves: The two of us have been going back and forth about our will. I think we need one, but my wife thinks we don’t since we’re not worth millions. Who’s right?

Answer: Since it’s never good practice on our part to get in the middle of a marital disagreement by picking sides, we’ll just say this: everyone – no matter your net worth – should have a will. Yet, according to a Caring.com survey from last year, only 42 percent of U.S. adults have estate planning documents in place.

There’s a general misconception that wills are only for ‘rich’ people, but in reality, most people own something that can be passed on – this could be investments, a retirement account, a savings account, an insurance policy, a home or other real estate, vehicles, even jewelry. Don’t you want a say in how your assets will be divided? Because realize this: if you don’t have a will in place, you’re basically letting the state decide what happens with your money and belongings.

You can create a pretty basic will through online services such as LegalZoom or through a software program like Quicken’s Willmaker Plus. However, as with anything concerning your finances, we recommend working with a real, live estate planning attorney. He or she can look at your particular circumstance to figure out the best legal course of action. For instance, maybe a living trust is a better option (unlike a will, a living trust avoids the probate process but is more expensive to set up).

Also, understand that beneficiary designations on accounts supersede what’s outlined in a will. Therefore, make sure you have everything in alignment so nothing is contradictory.

While you’re at it, it’s also a good idea to create a durable Power of Attorney and a healthcare proxy. These documents will name the person you want in charge of making decisions about your finances and your health if you’re not able to do so.

Here’s The Simply Money Point: Have a final say in what happens to your assets; take the time to create a will and update it (along with your beneficiary designations) after any major life event.

Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and Ed Finke and their team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email simplymoney@simplymoneyadvisors.com.